Week in Review: November 3, 2023

November 6, 2023

Recap & Commentary

Markets ended the week higher, with the S&P 500 enjoying its best week since Nov. 2022. Markets benefitted from optimism that the Fed might be done raising rates, along with updated borrowing plans from the Treasury, leading to a precipitous decline in longer term rates with the 10-year Treasury yield shedding 0.32% to end at 4.52%. October’s tepid jobs report also aided the rally.

As expected, the Fed left rates unchanged at its November meeting.  Speaking afterwards, Fed Chair Jay Powell indicated the Fed is unsure whether it has raised rates to a level deemed “sufficiently restrictive.” For its part, markets seemed to think they have, reflected in lower probabilities for further hikes.

October’s weaker-than-expected employment report aided the rally, as investors viewed the report as “bad-news-is-good” in the context of future monetary policy actions. Unlike other recent jobs reports where higher unemployment resulted from individuals entering the labor force, October’s rise resulted from 348K jobs lost, according to the household survey.

The US Treasury announced that it will borrow slightly less between November and January than previously expected. As part of that, it will sell ~$1B less of 10- and 30-Year Treasuries than previously expected, while issuing more short-term debt in the 2- to 7-year range. That led to sharp drop in longer-term interest rates. The Treasury cited the recent surge in longer-term rates as well as some “waning demand” for longer-term bonds at recent auctions for the shift.

Economic Commentary

The U.S. economy added 150K jobs in October, vs. expectations for 180K.  Figures for the prior two months were revised lower by a combined 101K jobs. The unemployment rate, as measured by the household survey, increased 0.1% to 3.9%, and has steadily increased since hitting a 50-year low of 3.4% in April. October’s rise in unemployment marked the highest level since January 2022. Average hourly earnings rose just 0.2%, while total hours worked declined 0.3%.  Though the weaker data was likely welcomed by the Fed, labor demand pointed to a still tight job market. Job openings increased 56K to 9.55M in September, against expectations for openings of 9.25M.  The number of jobs per unemployed person stands now stands at ~1.5x, vs. ~1.2x, pre pandemic.

Business activity in the manufacturing and service sectors came in lower than anticipated in October.  The ISM Manufacturing index declined to 46.7, lagging the consensus forecast of 49, and marking the 12th consecutive month of contraction. Only two out of 18 major industries reported growth during the month, with new orders and production both falling significantly. The ISM Services index declined to 51.8, lagging the consensus forecast of 53. Twelve out of 18 industries reported growth during the month, with a decline in business activity offset by an increase in new orders. Both indices remained comfortably in expansion territory for the month. The prices paid index fell slightly in October but remained elevated at 58.6. The reading indicates that inflation continues to be problematic in the service sector.

Of Note

Through Friday, 81% of S&P 500 companies had reported earnings. Thus far, 82% have beaten their consensus estimate. According to industry group FactSet, 3Q23 consolidate S&P 500 earnings growth is expected to be 3.7%, the first quarter of positive growth since 3Q22.

Market Indices   (As of 11/03/2023)

• Consumer Sentiment
• Consumer Credit
• Trade Balance
• Weekly Jobless Claims